Money Management
Money Management – The Key to Trading
By using the proper money management you will learn a skill that very few individuals properly educate themselves on when it comes to day trading. Unfortunately for many they disregard this as an important phase of their learning and this is a major mistake. This is what causes a large portion of new traders to blow out their trading accounts and in some cases a very large amount of money. They get into the habit that they have a system that can’t fail so they end up adding additional contracts to their trades. This causes them to over leverage their accounts and bring an abrupt stop to their trading career when they receive a margin call from the broker.
Sadly, many brokers do not help this cause and actually encourage traders to over leverage their accounts but allowing them to trade one contract for every five hundred dollars that they have in their trading account. In actual reality one show trade at a minimum of one contract for every $3,500 in their account and this is the minimum. The more money you allow in your account per contract the safer you will become. There is no way around the fact that you will have losing trades and by properly leveraging your account this will allow you to recover from losing trades. In the event you come across trading software or training that teaches you how to become a day trader and they say you will not having a losing trade with their method, run as fast as you can from them!
No matter how well planed out a trading course is you have to understand there will be losing trades. By using the necessary recovery techniques and money management you will survive losing trades and go on to continue your day trading career. If there is one topic I wish traders would focus more on it would be money management closely followed by the psychological factors one faces when day trading. If you manage to learn your trading method, money management and the psychological factors of trading you will be well on your way to becoming a professional day trader.
When using proper money management you will of course not be able to trade as many contracts as you possibly could. Many see this as a step backwards in their trading profession and they see it as lost profits. However, they ignore the fact that when they have a losing trade this will of course increase their losses. Without having the proper capital in your account to recover from these losses you will be basically swimming up stream. Always remember to have a proper money management plan laid out within your trading plan before you risk real money. By doing this you stand a much greater chance of being a professional day trader with the correct money management in place.
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